Al Qudra Holding PJSC (ADX:ALQUDRA) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Al Qudra Holding PJSC (ADX:ALQUDRA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Al Qudra Holding PJSC is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.019 = د.إ101m ÷ (د.إ7.6b - د.إ2.2b) (Based on the trailing twelve months to June 2020).

Thus, Al Qudra Holding PJSC has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.8%.

Check out our latest analysis for Al Qudra Holding PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al Qudra Holding PJSC's ROCE against it's prior returns. If you'd like to look at how Al Qudra Holding PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Al Qudra Holding PJSC doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Al Qudra Holding PJSC has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Al Qudra Holding PJSC's ROCE

In summary, we're somewhat concerned by Al Qudra Holding PJSC's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 12% return to shareholders who held over the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 6 warning signs we've spotted with Al Qudra Holding PJSC (including 2 which shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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